COMMERCIAL REAL ESTATE: NOT ALL BAD NEWS
While visuals of “dead malls” and “ghost town office towers” pervade the news media, there is a wide disparity between various sectors of commercial real estate since the Covid-19 pandemic began. Some sectors, such as industrial, apartments and healthcare-related office, are proving to be pandemic-resistant.
Hard Hit Sectors
Office buildings remain challenged within commercial real estate in 2020-21 and actual empty offices or fears of that possibility could persist for years. While it is true that once building utilization in our largest cities fell by 90% during 2020, many companies have already announced that they desire to return to their offices as soon as practicable. Working from home was a viable option for many office workers over the past year, although many workers are suffering from “Zoom-fatigue”, managers all too often report effectiveness has suffered, and new employee training has proven especially challenging. The desire to return to the office runs head-on with the open door plans or co-working spaces that many corporations adopted in recent years; the desire to spread out and give employees their own space may eventually mean that net demand for office space grows over time.
Senior living and shopping malls were two other hard-hit commercial real estate sectors. Senior living properties continued to receive bad news in 2020, as headlines and stories of inadequate sanitation at senior living facilities exposed both staff and residents to the Covid-19 virus at an alarming rate. Later in the year, residents reported bouts of depression as facilities clamped down on visitations, even from immediate family members. Shopping malls were already struggling with the growth of e-commerce, then the pandemic caused foot traffic to fall by more than 80% during 2020.
Glimmers of Hope
Industrial properties performed relatively well during 2020. Blackstone shared on their February 2021 investor call that industrial properties enjoyed 95% occupancy, led by a strong e-commerce portfolio. e Wall Street Journal noted in February 2021 that warehouse properties had attracted foreign property investors, drawn to the notable surges in online sales. Some of these investors, previously focused on big-city oce towers and condo buildings, now viewed owning a distribution property leased by Amazon in a suburban or mid-sized city location as akin to “owning a corporate bond given by one of the largest companies in the world”.
Another commercial real estate sector that was pandemic-resistant were apartment properties. Per Blackstone, performance was especially strong in the Sunbelt, ideally garden style apartments located in suburban settings with good school districts. Tenants appreciated greenery and landscaping surrounding their buildings when working from home. Not all apartment properties will fare well, especially as disappearing eviction protections, lower rent collections and so‑ demand begin to take their toll later this year.
A third sector that held up well last year was grocery-anchored retail centers, since grocery shopping was one of the few activities that forced people out of their homes in 2020.
Some traditional real estate players, including Blackstone and JLL, have increased debt levels for existing REIT funds to take advantage of improved property pricing in favored sectors such as industrial, apartment and healthcare sectors. Private investor Charles Koch stepped up his real estate reports in the past year, attempting to take advantage of so‑ commercial real estate prices, making significant purchases in late 2020 and early 2021. Koch Real Estate Investments explained to e Wall Street Journal in March 2021 that some of these properties may be “too expensive or complicated for others”, betting on a longer-term recovery. All in all, we still see plenty of opportunity in the real estate sector, both for income and long term appreciation.